- June 20, 2017
- Posted by: admin
- Category: Sell Your Business
When calculating your business’s worth in Las Vegas, you are making an estimation of what people would be willing to pay for it. Note that this process may differ from determining the fair market value of your business, which attempts to evaluate your business from a more objective standpoint, sans sales factors.
Also note that you will never be able to guess the true worth of your business as others might see it with 100 percent accuracy. The only way you can get close to this level of accuracy is to work with an experienced Las Vegas business broker and valuation expert who can apply all the contextual factors to assess your business’s value.
However, there are still plenty of methods available that can help you rather quickly estimate it within a fair range of precision.
Total Value of Assets
The quickest — and most distorted — way to gauge the value of your business is simply to look at the sum of your existing capital assets. This sum includes the equipment you own, any property you own, your liquid cash-on-hand, your current inventory and other hard assets you could directly convert to cash. It can also include an approximation of the value of more malleable assets, like your customer lists or any patents you own.
Put together, this valuation would be the total amount of cash you could generate if you sold all your capital assets piece-by-piece on an open market today. Very few business owners would be willing to do this because this value does not reflect the earning potential of the business.
Multiples of Sales or Earnings
The second quickest way to glean a value for your business is to take last year’s sales and multiply them by a constant that supposedly represents the growth potential for your industry. These “selling multiples” are calculated and tabulated by organizations, and they are obtained by various formulas depending on the industry.
A retail business, for instance, might obtain a multiple by dividing its enterprise value by its EBITDAR (earnings before interest, taxes, depreciation, amortization and restructuring or rent costs). This number will then be multiplied by the business’s total sales, so a retail operation earning $1.3 million in sales over the past year may be multiplied by a factor of 1.5 to create a total value of $1.95 million.
Revenues are usually not a great indication of earnings potential, though, so the multiples method may instead apply the multiple to profits or seller’s discretionary earnings.
The industry multiples method is considered “quick n’ dirty,” but it is a much more accurate snapshot of the potential market value of your business compared to the sum of your assets.
Discounted cash flow analysis
This business valuation method is a much more detailed look at the company’s earnings and cash flow, while accounting for variables that can skew an accurate value estimate.
Performing it is fairly long and complicated. You can get the full rundown on sites like Investopedia. The gist is that you are performing a free cash flow projection, and then discounting it to estimate the current value before the projected earnings.
A quick summary of the process would look like this:
- Determine a forecast period based on the strength of the market and its growth potential
- Forecast revenue growth based on the company’s previous performance and market factors
- An optimistic estimate would be stable growth YoY using last year’s growth rate
- A conservative estimate would predict shrinking YoY growth throughout the forecast period
- Obtain both an optimistic and conservative projection to give your prediction a fair range
- Estimate free cash flow by taking total yearly projected sales revenue minus taxes, operating costs, working capital requirements and net investment
- Do this for each year at a time using both optimistic and conservative revenue growth estimates
- Determine a discount rate, such as Weighted Average Cost of Capital (WACC)
- Calculate a terminal value using a method like the Gordon Growth Model
- This number represents the projected enterprise value of the company at the end of the projection period, accounting for the discount rate and other growth factors
- Subtract current company debt from this projected EV, and voila!
Working with a Las Vegas business broker and valuation expert to determine an accurate business value
If the last method above sounds complicated, recognize that it is one of the more simplified ways to obtain a company value. It relies on so many generalized estimates and projections.
When working with a Las Vegas business valuation expert, you can obtain quick valuation estimates like these as well as much more accurate estimates based on your local market. You can also get more nuanced growth projection models for your industry and a host of other factors that can tell you exactly where you stand.
If you have any questions or you want to get started today do not hesitate to contact Jamie Schwartz of Schwartz Strategy and Valuation, at 702-278-1346.